All-India cement prices increased by Rs 4/bag m-o-m in December 2017 led by increases in the North (+ Rs 16/bag m-o-m) as companies attempt to offset cost increase post pet-coke usage ban in three states. Prices in other regions remained largely subdued — South and East prices were flat while West saw a marginal decline. The demand environment remains weak (-2.7% y-o-y in October, per DIPP) and cost pressures are rising — we expect another year of earnings downgrade in FY2018e.
Cement prices increase by Rs 4/bag m-o-m in December 2017 led by North, Central regions
All-India cement prices increased by Rs 4/bag m-o-m to Rs 323/bag in December 2017 post six straight months of decline since May 2017 — however, the price increase was largely concentrated in North & Central markets which are also affected by the pet-coke ban. As per our channel checks, prices increased by Rs 16/bag m-o-m in the North and by Rs 6/bag m-o-m in the Central region while West saw a modest decline of Rs 3/bag m-o-m. Cement prices in the South (+Rs 1/bag m-o-m) and East (+Rs 1/bag m-o-m) were largely flat. We highlight that all-India prices are still down by Rs 26/bag from the peak seen in May 2017 (Rs 349/bag).
North and Central: The price increase was the highest in Delhi (+ Rs 25/bag m-o-m) followed by Haryana (+Rs 20/bag m-o-m) while Punjab and Rajasthan saw an increase of Rs 13/bag m-o-m. We highlight that the Supreme Court has banned the use of pet-coke as a fuel across Rajasthan, Uttar Pradesh and Haryana . We estimate that the price increase will largely offset the cost inflation due to the switch to a higher cost fuel.
FY18e likely to be another year of earnings downgrades
FY2018 started on a good note with sharp price increases. However, subdued demand and one-off disruptions led to sharp price correction since May 2017. We expect another year of earnings downgrades in FY2018e as rising costs present another headwind in a weak environment. Valuations of large cap. names are rich despite optimistic earnings estimates. We prefer Grasim Industries, JK Lakshmi and Dalmia Bharat where valuations are more reasonable.
Other trends — costs to increase; industry volumes remain weak
Pet-coke prices have risen to $105/ton in November 2017; prices have steadily risen since July 2017. We expect costs of cement companies to further increase in Q3FY18. Cost environment remains challenging for companies on the back of rising costs as well as the ban on pet-coke usage in Haryana, Uttar Pradesh and Rajasthan with a likelihood of inclusion of other states as well. Companies are unable to fully pass on the cost increases in a challenging demand environment— industry volumes again declined by 2.7% y-o-y in October 2017, as per DIPP.